Published 4:00 am, Thursday, March 12, 1998

A New York trader who stood to profit from a decline in the stock of Computer Learning Centers disclosed yesterday that she had conducted a private investigation aimed at exposing fraudulent practices at the trade school chain.

The trader, who asked not to be named, took her case to education officials in five states. One of those, Illinois, sued CLC on Tuesday, causing its stock to plunge 47 percent in two days and handing the trader a windfall.

A spokeswoman for Illinois Attorney General Jim Ryan denied any connection between the trader's investigation and the suit, noting that the state began its own probe into CLC six months ago.

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But even if the trader's complaints played no role in Ryan's decision to go after CLC, the situation has raised the question of whether investors should actively try to influence public perception of stocks they own.

A spokesman for the Securities and Exchange Commission said it's unclear whether the trader broke any laws. However, "there's no regulation against people doing research," he said. "We usually just concern ourselves with cases of securities fraud."

The Illinois suit accused CLC of failing to provide students with adequate training and equipment and raising false hopes about jobs and salaries they could get after graduating. Ryan asked a court to suspend's CLC's charter to operate in Illinois.

Based in Fairfax, Va., CLC operates 14 centers across the country. It has 11,000 students, including about 900 at centers in San Francisco and San Jose. It offers training in computer software, programming, networking and electronics, charging up to $13,000 for the equivalent of a two-year degree.

California Attorney General Dan Lungren's office would not disclose whether he is investigating its operations here.

Shares of CLC, which had traded at $36.88 on Monday, dropped $9.25 on Tuesday in the wake of the lawsuit. The price fell an additional $7.89 yesterday on fears that other states -- including Virginia -- might file similar suits.

Although many investors lost money in the two-day plunge, the New York trader came out ahead, using a technique called "short-selling." A short-seller borrows shares of a stock, then sells them. If the stock goes down, the short-seller can buy the shares back at a cheaper price, return them to their owner and pocket the profit.

Analysts said the company's stock was ripe for a fall because it was overvalued, with a price equal to as much as 70 times its annual earnings per share. "With a very high multiple like that, any kind of negative story is reason for investors to run," said analyst Howard Block of BancAmerica Robertson Stephens.

CLC's stock has been irresistible to short-sellers. In recent months, the number of shares of CLC held by short-sellers has soared from 50,000 to 4 million, out of 11 million outstanding shares.

But while most short-sellers crossed their fingers and hoped for CLC to go sour, the New York trader did something about it.

She sent emissaries into CLC centers to secretly tape conversations with admissions officers. She said she didn't investigate in California because it's illegal to secretly record conversations here.

The tapes proved that the company's chief concern was making sure that students could qualify for federal loans, she said.

She also had her people purposely fail admissions tests, only to be told they had done well and encouraged to enroll and apply for financing.

In addition, she said she interviewed more than four dozen CLC students and former employees who corroborated her suspicions that the company was defrauding its students.

The trader said she took her evidence to the education departments of five states in the past few months.

A spokeswoman for Illinois' attorney general said the state acted on the case after it was referred by the Board of Education. But she denied any connection between the trader's investigation and the lawsuit, noting that the state began its own investigation six months ago.

But one analyst said the word was out that short-sellers had lobbied heavily in favor of legal action against CLC.

The trader said she felt no need to defend her actions, which she conceded had made her and her firm "a ton of money."